Era of Alternative Lending: Trends & Market Opportunities

The pandemic has been a reason why small businesses have to close their businesses. This is where exactly the alternative lending market took its growth.

What does it mean…? Let’s make it more clear.

During the pandemic when most small businesses have failed or been at a loss. To restart over again, those business owners needed to lend some loans. Doing this process via a traditional method is quite difficult or a long process. You need to verify your documents and wait months to get the loan disbursement.

Along with this, Indian MSMEs faced a massive credit gap. Some studies estimate this deficit to be to the tune of ? 45 Lakh Crores, or $ 600 Billion. This credit gap is so large that almost 9 out of 10 MSMEs in the country have to resort to informal sources of credit. Due to the limited access to formal credit facilities.

Alternative lending comes from non-government organizations that offer credit loans and immediately use advanced technologies.

What is Alternative Lending?

Alternative Lending refers to the many options available for credit loans from non-bank lending. Like, peer-to-peer lending, small business alternative loans, and lending CRM. Alternative lending brings investors who want to grow their finances and consumers or small business owners who want to borrow money.

It is the process of lending money from non-profits and non-licensed financial institutions. Where Investors lend money to consumers or small business owners with a fixed or non-nixed (revenue-based) method.

It’s a marketplace lending where you can fill up your details and borrow money in minutes. These alternative ways are far faster and simpler than traditional lending money from banks. As it uses digitalization and technological methods

How does it work?

Above, we have discussed what alternative lending is…? Let’s discuss how it works.

Alternative leading works on computer algorithms, machine learning, and artificial intelligence to mine the applicant’s data.

With technologies, they found every need for applicants' data and offered their alternative lending methods.

Traditional banks cannot provide loans to businesses every time they need them. Even if they have strong financials and a track record of success. Because of the limitations of overflowing the cash and many more. So, Investors who wanted to raise their funds over time gathered with consumers and small business owners to provide them with loans.

If we look at the ratio, last year's alternative lending provided 26% to small business owners. Meanwhile, conventional banks offered 14.3% of the loan amount.

And the basic reason for speeding the growth of this sector is you can take out a loan in 5 minutes sitting at your home with simple verification via technology.

Difference between a bank loan and alternative lending?

Business models:

Alt lending offers many fundraising ways: Credit Unions, Community Development Financial, Institutions (CDFI), Microlenders, P2P (Peer-to-peer) Lenders, Crowdfunding, FinTechs, Marketplace lending, and more. They also offer small and medium-sized businesses services, such as invoice factoring or equipment financing.

With data analysis and automation, alternative lenders can predict risks more and approve loans to business owners.

Interest rates:

With fast processes and better services, the Interest rate of alternative lending is high compared to conventional ones, 5 to 13. Depending upon the loan period, it also offers loans with low-interest rates if the time is short. Whereas the time for a bank loan is only for 1 to 3 years

Application Process:

Application is straightforward with digitalization. Your loan will be credited to your bank account in a very short period.

Alternative Lending has become more popular among enterprises

Because of alt lending’s market size, different working models, transparency, and other features, alt lending is winning over the market. And looking that traditional banks have also started accepting & restructuring banks. It’s a secondary market for online credit.

Other than offering loans, alt lending has other options to overcome their crisis or money need, which can benefit both lender and investor. These are reward-based crowdfunding, equity crowdfunding, revenue-based financing, online lenders, peer-to-peer consumer and business lending, and invoice trading third-party payment platforms.

The most popular among alternative lending is revenue-based financing, based on obtaining credit by leveraging estimated earnings. Both investors and lenders work on a revenue-based model based on equity percentage. Borrowers must pledge a specific percentage of their income, also known as revenue share, to the investor or lender. Thereafter, they need to repay the principal amount + revenue share to the lender.

Conclusion

If you want to credit a loan with paperless work, alternative lending is the best way. You will protect yourself from time wastage in bank queues for loan approval.?

In countries like the U.S.A., alternative lending is a massive threat to traditional banks and the best way to collect funding.??

But, there are still some difficulties. The regulatory framework's uncertainty is stifling this segment's growth. There are also few technology players in this space. Implementing advanced analytics and data mining tools can thus be costly for these businesses. Identifying the target customer and establishing trust takes time as well.

FAQs

Which is an example of alternative financing?

Reward-based crowdfunding, equity crowdfunding, and revenue-based financing are examples of alternative funding.?

What is the Alternative lending market size?

According to a recent analysis by Grand View Research, Inc. The size of the global alternative lending platform market is anticipated to reach USD 14.47 billion by 2030, expanding at 23.6% CAGR from 2022 to 2030.

What is revenue-based financing?

Revenue-based financing is a kind of Alternative Lending. In a revenue-based model, borrowers must pledge a specific percentage of their income and repay the principal amount.?